Too Fast, Too Soon?

Just how one to view the "disclosures" made by banks with regard to their non-performing assets (NPAs) or stressed assets on their books?

You can opine the Reserve Bank of India's (RBI) rap on the knuckles has made banks come clean; that the "deep surgery" advocated by Raghuram Rajan is the right way to go. Another is to pose: are we being hasty in forcing banks to provide for all bad-loans in one go? For there is trade-off involved in such an approach.

What's at stake here?
Last week, two of the country's marquee private banks - ICICI Bank and Axis Bank - told us how bad the dud-loan problem was when they declared their end-March'16 financials, ICICI Bank said Rs 44,000 crore in loans (4.8 per cent of its assets) were under strain. Axis Bank said that Rs 22,600 crore were "under watch". That is Rs 66,600 crore may stand to technically worsen going ahead. Add on these kind of loans that reside within the banking system and the number will be huge - we will come to know when all banks declare their end-March'16 results are consolidated and made "uniform".

That's because the way figures are put out were not uniform. Says Parag Jariwala at Religare Institutional Research: "Asset quality disclosures stepped up in the fourth quarter but fail to alleviate concerns: Both these banks (ICICI Bank and Axis Bank) have used different parameters in their disclosures. ICICI Bank has included non-fund exposure, 5:25 restructured assets and SME loans, which is positive. However, it has restricted its watch list to only the top five stressed sectors whereas Axis Bank watch list includes its entire book".

It's also not clear at this point if there has been a fresh impairment in bank asset quality over the last two quarters or whether it is only a recognition of what had already gone bad anyway. That all this "new bad-loans" is nothing but the outcome of the asset quality review undertaken by Mint Road which was reflected in the third quarter and the follow-up moves made in the fourth. But if there was, indeed, fresh impairment, it can only worsen due to the remedial measures now taken.

And the trade-off is straightforward - banks will slam the brakes on fresh credit exposure to these firms (and sectors). Starved off funds, it remains to be seen how these stressed firms turn matters around. Look at it another way: if these firm's loans are to be restructured (they will surely need surgery), banks will have to take a huge haircut. Will they then have the appetite to take on fresh exposure to these firms if it is needed as an "interim relief" measure? And having been singed badly, the "sectors" in which these firms reside will also turn out to big "no-no" for banks.

The time-bomb had been ticking…
The bad-loan debate has caught the public imagination like never before and one risks being called all kinds of names if a suggestion is made that Mint Road has been harsh on borrowers or that all them are being painted by the same brush - of malfaescence. For once, bank unions are seen as being on the right side of the debate.

The All India Bank Employees Association (Aibea), the largest and oldest trade union of bank employees has been harping on the menace of increasing bad loans in banks for the past 25 years.

Says Aibea general secretary, Vishwas Utagi: "While there would be cases of loan default due to genuine reasons, but high volume loan defaults have been developed into an exquisite art in the banking Industry? The default of loan for reasons beyond the control of the borrower or industrialist is understandable, but the spurt and rise in bad loans in banks in the last few years is alarming indicating something is basically wrong".

On 28 June 2012, K.C. Chakraborty, former deputy governor-RBI, gave bank chiefs an earful: "You have misguided your investors for the past five years by not giving proper NPA figures." For the third quarter of 2011-12, Mint Road had put in place a new system-driven reporting (compared to manual reporting) of NPAs; you could not "negotiate it" with a bank anymore. Chakraborty was acerbic: "So long as system-generated NPAs were not there, was the computer giving wrong figures? Is it not an irony for banks to claim that NPA levels in a particular period went up as they moved over to 'system-generated' NPA computation?"

His comments came on the day of the release of the Financial Stability Report (FSR; June 2012). It stated that at the systemic level, the gross NPA ratio (before provisioning) was up at 2.9 per cent as of March-end 2012, up from 2.4 per cent a year earlier. But the net NPA ratio had moved up sharply to 1.3 per cent (0.9 per cent). Six months earlier, another edition of the FSR (December 2011) reported that "an analysis of the growth rate (of NPAs) in the first half of 2011-12 at 25.5 per cent is more than triple the average growth rate of 7.4 per cent in the first-half years during 2006-2011".

The trouble with any debate that enters the "popular" is that it takes a life of its own. The "NPA hydra" can mutate into something else now.